S7 Assessment Exam Questions and Answers with Rationale
1. Sales Proceeds per share as a result of exercise of a put:: the sales pro- ceeds upon exercise
of a put option is found by subtracting the premium from the strike price of the put.
**If you own the put contract you have the ability to sell at the strike if exercised, but you paid a
certain amount to do that. (premium). So subtract the cost of what you paid (premium) from the
money you made made selling the put at strike
2. Credit Spread: a credit spread involved the purchase and sale of two option contracts, both of
the same class (put, put OR call, call). The contract which is sold has a higher premium than the
contract purchased (gives you the credit). In this question, the Nov 60 put will have a higher
premium than the Nov 50 Put, creating a credit spread.
**A credit spread involves selling, or writing, a high-premium option and simulta- neously
buying a lower premium option. The premium received from the written option is greater than the
premium paid for the long option, resulting in a premium credited into the trader or investor's
account when the position is opened. When traders or investors use a credit spread strategy, the
maximum profit they receive is the net premium.
3. Debit spread: used to offset the maximum loss. Occurs when you buy option with higher
premium and sell one with a lower premium and the loss is debited to trader's account
**trader buys one May put option with a strike price of $20 for $5 and simultane- ously sells one
May put option with a strike price of $10 for $1. Therefore, he paid
$4, or $400 for the trade. If the trade is out of the money, his max loss is reduced to $400, as
opposed to $500 if he only bought the put option.
4. A customer has placed a market order to purchase EMD with a broker-deal- er, and
requests that the order be directed to a specific exchange which is not currently posting the
,best national price for the stock. The broker-dealer must:: execute the order in the venue as
directed by the customer
**Regulation NMS requires that a broker-dealer route a customer order to that ex- change
currently POSTING the MOST FAVORABLE PRICE. However, a customer may request that their
order be directed to a specific venue and the firm must comply with this request
5. Text messaging may be used between clients and RRs for business mat- ters if:: the
broker-dealer can supervise and preserve the text messages
**Text messaging is a permitted form of communication between clients and RRs only if the
messages can be supervised and retained in the firm's files
6. A registered representative has a CPA who is in a position to introduce new clients to the
RR's broker-dealer and asks for a fee based on commissions generated by the accounts
introduced. Which of the following statements
is true?: Finder's fees for introducing new clients to the firm may be paid to UNREGISTERED
persons, provided they are hourly or flat fees, and NOT BASED on any commissions generated by
these accounts
7. A complaint has been received from a long-standing customer of the firm, and the matter
has been escalated to the compliance department of the firm. The complain must be kept on
file for:: four years FOLLOWING the RESOLUTION of the complain (makes sense the resolution
should be found before complaint goes away)
8. A client is looking for a very safe instrument that will not produce any current income
but will provide payout in ten years providing funds that can then be deployed towards an
educational goal. What is the most appropriate choice for the client?: Treasury Strip
, **The Treasury STRIP would be the most appropriate choice for this client. These products are
US government bonds which are sold at a discount to their face value and pay full face value at
their maturity. This product does not make interest payments to the holder, which satisfies the
objective of the client. The fact that they are US governments products makes them very safe
9. An ETF is a heavily invested in various fixed income securities. Individuals who own this
ETF are holding a:: equity security
**AN ETF is considered an equity security and is actively traded in major securities markets
10. An investor who has purchases two call options and and sold two call options. The call
options purchased have different strike prices, while the calls sold have the same strike
price. All contracts have the same expiration month. The investor has created a:: butterfly
spread
**A butterfly spread if created using 4 options contracts with three different strike prices and one
expiration. The strategy may be employed by options trader who anticipates a stable market for
the underlying security
11. A variable annuity product issued by the ABC Insurance Company has re- ceived an AAA
rating, the highest available for the product.When discussing this rating with potential
investor, an RR may indicate that: the insurance company has a very strong ability to pay
claims, but there are no assurances as to how investments in their portfolio might perform
**ratings or guarantees of variable life and variable annuity products are based on the ability of the
insurance company to honor claims, not to provide any guarantees of performance of investments
within these products
12. Average cost per share: total cost/number of shares
1. Sales Proceeds per share as a result of exercise of a put:: the sales pro- ceeds upon exercise
of a put option is found by subtracting the premium from the strike price of the put.
**If you own the put contract you have the ability to sell at the strike if exercised, but you paid a
certain amount to do that. (premium). So subtract the cost of what you paid (premium) from the
money you made made selling the put at strike
2. Credit Spread: a credit spread involved the purchase and sale of two option contracts, both of
the same class (put, put OR call, call). The contract which is sold has a higher premium than the
contract purchased (gives you the credit). In this question, the Nov 60 put will have a higher
premium than the Nov 50 Put, creating a credit spread.
**A credit spread involves selling, or writing, a high-premium option and simulta- neously
buying a lower premium option. The premium received from the written option is greater than the
premium paid for the long option, resulting in a premium credited into the trader or investor's
account when the position is opened. When traders or investors use a credit spread strategy, the
maximum profit they receive is the net premium.
3. Debit spread: used to offset the maximum loss. Occurs when you buy option with higher
premium and sell one with a lower premium and the loss is debited to trader's account
**trader buys one May put option with a strike price of $20 for $5 and simultane- ously sells one
May put option with a strike price of $10 for $1. Therefore, he paid
$4, or $400 for the trade. If the trade is out of the money, his max loss is reduced to $400, as
opposed to $500 if he only bought the put option.
4. A customer has placed a market order to purchase EMD with a broker-deal- er, and
requests that the order be directed to a specific exchange which is not currently posting the
,best national price for the stock. The broker-dealer must:: execute the order in the venue as
directed by the customer
**Regulation NMS requires that a broker-dealer route a customer order to that ex- change
currently POSTING the MOST FAVORABLE PRICE. However, a customer may request that their
order be directed to a specific venue and the firm must comply with this request
5. Text messaging may be used between clients and RRs for business mat- ters if:: the
broker-dealer can supervise and preserve the text messages
**Text messaging is a permitted form of communication between clients and RRs only if the
messages can be supervised and retained in the firm's files
6. A registered representative has a CPA who is in a position to introduce new clients to the
RR's broker-dealer and asks for a fee based on commissions generated by the accounts
introduced. Which of the following statements
is true?: Finder's fees for introducing new clients to the firm may be paid to UNREGISTERED
persons, provided they are hourly or flat fees, and NOT BASED on any commissions generated by
these accounts
7. A complaint has been received from a long-standing customer of the firm, and the matter
has been escalated to the compliance department of the firm. The complain must be kept on
file for:: four years FOLLOWING the RESOLUTION of the complain (makes sense the resolution
should be found before complaint goes away)
8. A client is looking for a very safe instrument that will not produce any current income
but will provide payout in ten years providing funds that can then be deployed towards an
educational goal. What is the most appropriate choice for the client?: Treasury Strip
, **The Treasury STRIP would be the most appropriate choice for this client. These products are
US government bonds which are sold at a discount to their face value and pay full face value at
their maturity. This product does not make interest payments to the holder, which satisfies the
objective of the client. The fact that they are US governments products makes them very safe
9. An ETF is a heavily invested in various fixed income securities. Individuals who own this
ETF are holding a:: equity security
**AN ETF is considered an equity security and is actively traded in major securities markets
10. An investor who has purchases two call options and and sold two call options. The call
options purchased have different strike prices, while the calls sold have the same strike
price. All contracts have the same expiration month. The investor has created a:: butterfly
spread
**A butterfly spread if created using 4 options contracts with three different strike prices and one
expiration. The strategy may be employed by options trader who anticipates a stable market for
the underlying security
11. A variable annuity product issued by the ABC Insurance Company has re- ceived an AAA
rating, the highest available for the product.When discussing this rating with potential
investor, an RR may indicate that: the insurance company has a very strong ability to pay
claims, but there are no assurances as to how investments in their portfolio might perform
**ratings or guarantees of variable life and variable annuity products are based on the ability of the
insurance company to honor claims, not to provide any guarantees of performance of investments
within these products
12. Average cost per share: total cost/number of shares
